How does Blockchain technology work
When Satoshi Nakamoto first published the Bitcoin whitepaper in 2008, its greatest innovation was not the concept of a cryptocurrency. Infact, other forms of digital cash like b-money and BitGold before it were cryptocurrencies relying on Proof of Work schemes. The greatest innovation was in fact, the Blockchain. An immutable public ledger of all the transactions that have ever occurred on the network. It’s due to this technology that we can achieve a trustless peer to peer currency like Bitcoin, in which no central authority processes transactions, but everyone knows that there is no double-spending due to this public record.
In Bitcoin, Block creation is as follows: a miner finds blocks via Proof of Work mining, he then transfers the block’s header and the associated transaction’s tree to the network, other miners then verify that every transaction within it is correct and include the block on the blockchain (that block will also include what is known as a coinbase transaction, a transaction with newly created coins sent to the miner who found the block). Each block must “fit in” with the previous one, hence the name.
This system has allowed us to have a completely peer-to-peer network, with uncensorable transactions and a predictable issuance rate. It has brought us many novel features and improvements in the field of money like lower fees, microtransactions, programmable money, and more. Some, however, saw other applications for this technology, and have built new systems that surpass the applications of currency.
Over time, blockchain technology has been used to store more than transaction records. Data stored on a blockchain can not be edited or deleted, meaning that blockchains can be used to store immutable records like financial records, real estate records, credit records, identity, and so on. This improves on the current centralized systems that require us to trust the entity that keeps the records to not tamper with them. Projects like Factom offer a data layers that allows us to secure millions of records on a blockchain with a single hash on the Bitcoin blockchain.
Other projects have used blockchain for far more complex applications, like Ethereum. Ethereum allows the creation of complex smart contracts and decentralized applications, apps that run on multiple nodes and not on a centralized server. These decentralized applications or dapps for short allow applications to be uncensorable and unhackable, because there is no main server to hack, one would require to take thousands of computers down to shut down one application.
Blockchain is considered one of the biggest innovations in finance and technology and is currently being tested on and used by several companies and institutions in in mostly every business sector. A few recent examples: